Tuesday, 20 November, 2018

RBI autonomy essential, says finance ministry amid rift with central bank

RBI Governor Urjit Patel could quit RBI Governor Urjit Patel could quit
Nellie Chapman | 31 October, 2018, 10:45

As per the Section 7 of the RBI Act, the Central Government is entitled to give directions to the Central Bank after it consults the RBI Governor. For the goal, extensive consultations on several issues take place between the government and the RBI from time to time.

The government issued the statement to address the perception of growing differences between the finance ministry and the country's central bank. He further sought independent working of the Central Bank.

The letters are the latest flare-up in a dispute between the central bank and the government. RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.

The All India Reserve Bank Employees Association on Monday came out in support of RBI deputy governor Viral Acharya's speech, saying that the government should stop nibbling at its autonomy.

The government has cited a never-used legal provision in trying to resolve disagreements with the central bank, which could lead it to direct the monetary authority to do its bidding if invoked, people with knowledge of the matter said.

"It is hard to believe that the RBI governor will resign because it is unprecedented and would look quite irresponsible and (an) immature step", said a senior trader at a foreign bank.

With Government invoking the never used section, the central bankers feel that it will leave the very little scope of the bank to work in the way they deem to be fit.

BJP slammed Rahul Gandhi for his criticism against Prime Minister Narendra Modi over the RBI-Centre rift, and said that it reflects Congress party's grounding, "which is fast eroding in national politics". There is also a rumoured rift with finance minister Arun Jaitley. "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added.

Unlike in the past, all four RBI deputy governors attended the FSDC meeting along with Dr. Patel.

Another government official told Reuters that it was vital that what happened between the government and RBI was kept confidential.

The council discussed at length the issue of real interest rate, current liquidity situation, including segmental liquidity position in NBFCs and the mutual fund space, an official statement said. "The government respects the autonomy and independence of the RBI but they must understand their responsibility", the official added.